Tuesday, June 1, 2010

Apple and the iPad Party

When the iPad was announced, a certain fraction of the gallery wondered what the big deal was; the market was so small for such devices that it could hardly be expected to matter to a company whose market capitalization is so large as Apple's.

After selling a million within a month (twice as fast as the iPhone) and two million in less than sixty days, Apple is now expected to sell more iPads than computers in the third quarter. Apple already sells more iPads than MacBooks.

Given that the iPad, like the iPhone, synchs to a computer, Apple is planting the seeds of more Mac purchases. Given that the iPad – like the iPhone and the touch-screen iPods – runs applications sold through a high-volume application store capable of generating substantial post-sales revenue, one might wonder whether the iPad is a bigger deal for Apple over the long run than desktop computers. (Though pricier, full-on computers' longer usable life combines with their lack of post-sales revenue to suggest second-fiddle status for many models. Complete computer systems from Apple have traditionally been out of the range of most global buyers, making the addressable market for iPads dramatically larger. Assuming iPad add-ons such as protective covers, docks, cables, and so on are also high-margin products, Apple may be making more money on iPads than the sticker price suggests.) Whether Apple can sustain 200,000 units per week is something we should learn over the next few quarters; much of this may be initial-order backlog not yet worked off by new unit production.

Apple seems to be doing for tablets what it did for music players: delivering an integrated package so attractive to users that it actually changed the size of the market.

In the meantime, Apple's competitor Google – also a global surprise for figuring out how to get rich from online search engine activity – is being depended on by people who apparently trust their common sense less. Ms. Rosenberg followed Google's walking-directions beta onto a freeway, where she was struck by a car, and has filed suit. I predict victory for the defense, though perhaps not cheaply. California is a famously costly place to litigate.

Apple's other competitor, Microsoft, said Google was doomed to play second-fiddle to MSFT in the tablet space. This ignores MSFT's effort to compete with Linux by dropping Windows XP licenses to $15 on netbooks (half the usual cost of the "Starter Edition"), and its subsequent effort to upsell OEMs to higher-cost versions in Windows 7. No news yet on how successful MSFT's upsell effort has been, but MSFT's history of declining OS revenues doesn't bode well for its future ability to keep the cash cow mooing as the world moves toward standards that devalue MSFT APIs such as Win32. The claim Google will never catch Microsoft curiously ignores that Apple has apparently taken the bulk of the previously-minuscule tablet market with a seven-digit-per-quarter sales volume.

Google will likely benefit from non-MSFT operating systems, whether they involve Google's Linux-based OS or anyone else's: Google will have a better chance to reach customers with standards-compliant browsers and search tools that aren't biased against Google. The primary losers in the move toward standards are sellers of developer tools such as Adobe and Microsoft. Google wins on search regardless who takes the OS share. Apple wins only to the extent Apple gains sales, but since Apple is apparently taking the lion's share of the tablet market and is likely to keep the high end of the market, this plays toward Apple in the foreseeable future.

UPDATE: Morgan Stanley offers some charts and numbers suggesting that netbooks may have peaked and that iPads are on track to eclipse the netbook market. The revised market numbers suggest iPad's release caused not just a flattening but a decline in netbook sales compared to the year-previous April.

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